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The Leading Advisor to the Aviation IndustryThu, 15 Mar 2018 14:18:41 +0000en-UShourly1https://wordpress.org/?v=4.9.4How come the Airbus 380 king of the skies appears to be on life support?https://www.avitas.com/airbus-a380-king-of-skies-on-life-support/
https://www.avitas.com/airbus-a380-king-of-skies-on-life-support/#respondThu, 15 Mar 2018 12:56:52 +0000https://www.avitas.com/?p=4584The Airbus A380 relied too much on a single customer, which was likely paying below average price for the aircraft, according to Adam Pilarski, senior vice-president at AVITAS. Download the PDF Version – How come king of the skies appears to be on life support? The Boeing flagship 747 was often called the “queen of […]

The Boeing flagship 747 was often called the “queen of the skies” and the Airbus A380, the largest Airbus product, was sometimes referred to as the “king of the skies”. Recently, it looked like the curtains were being drawn on this programme, which, when launched, was seen as having the potential of becoming one of the premier and most influential programmes in aviation history. Only a last minute re-order of some additional units by the “old reliable” customer, Emirates, saved the Airbus A380 for the time being but virtually nobody believes the programme will survive in the fairly near future.

So, what has happened to the great aspiration of the king of the skies, and why did it not claim the role it was destined to have?

First, it might be beneficial to revisit the rationale for the A380. It was not, as some claim even today, Airbus’s belief that traffic patterns will evolve into people relying more and more on flying between the biggest cities on the biggest available aircraft. That mistaken view purports that Boeing followed a different strategy of building smaller point-to-point aircraft, such as the 787, as against Airbus betting on huge hub centric platforms exemplified by the A380. In fact, these two aircraft are not competitors.

Airbus also was pursuing a policy of designing smaller point-to-point units documented by the expansion of the A330 and the development of the A350 programmes.

The real reason behind Airbus’s launch of the A380 was its desire to achieve its long-term goals of a 50% market share. With the demise of McDonnell-Douglas in 1997, the creation of a true duopoly in the jet aircraft market became feasible. The A380 was seen as pivotal in achieving that market share goal. This was because it is easier to gain market share by selling high-cost items. And Airbus truly believed that the 747 being in a monopoly segment earned Boeing extra profits which were being utilised to cross-subsidise its other product lines. The launch of the A380 programme was promoted as a strategic move for Airbus, not as the best solution for airlines to optimise traffic developments.

Airbus has only 337 firm orders for the A380, including the recent strong-arm sale to Emirates. In list prices, this amounts probably to more money than the GDP of some countries but, as a current aircraft programme, it is not very impressive. About half of the total was ordered by one customer and, as of year-end 2017, 222 were already produced. These are not very impressive statistics.

So, what went wrong? First, what went right? It is important to remember that Airbus managed to achieve a de facto equal market share to Boeing, which was its stated goal for a long time. How much the A380 contributed to that may be open for debate but I cannot see how it was not a big contributor to the Airbus strategic success. So how come the programme appears to end up on life support?

It is way too heavily dependent on one customer. It also sold only to the largest and most influential airlines in the world. This causes problems in sales prices. The top and launch customers historically pay below-average prices. In the same way as not all children can be above average, not all airlines can pay below-average prices for a programme to become successful. You need many second-tier airlines to join which will pay above-average prices. This has not happened.

Additionally, the secondary market failed to develop. It could be because the initial aircraft were financed at rates much higher than true sales prices, making it difficult to release them at reasonable rates making sense to owners and new purchasers.

It appears to me that Airbus’s heart was not really in the programme beyond achieving its initial strategic objective: to reach parity in market share with Boeing. That probably was enough for Airbus management. To be successful, the programme would need substantial investments and managerial attention. The platform would have to be stretched, new engines would have to be installed and serious efforts would have to be made to develop a solid secondary market. Airbus did not follow that path. Hence, the A380, the so-called king of the skies, will probably
be a magnificent but sad footnote in the history of aviation.

]]>https://www.avitas.com/widebody-aircraft-maintenance-costs/feed/0The Underappreciated Value of Experience and its Relevance Todayhttps://www.avitas.com/underappreciated-value-of-experience-relevance-today/
https://www.avitas.com/underappreciated-value-of-experience-relevance-today/#commentsTue, 30 Jan 2018 16:19:11 +0000https://www.avitas.com/?p=4557With a downturn on the horizon, a surfeit of new market players that have not been through one before is disconcerting, writes Adam Pilarski, Senior Vice-President at AVITAS Download the PDF Version – The underappreciated value of experience and its relevance today December 26 was the anniversary of Chairman Mao’s birth. The Chinese government is […]

December 26 was the anniversary of Chairman Mao’s birth. The Chinese government is pursuing a campaign of dismissing foreign influences on its population and going back to its own roots. People, especially Communist Party members, were urged not to observe Christmas but celebrate the “day after”, in memory of the “Great Leader”.

It is interesting that many people support such sentiment in China, some old and some quite young. Chairman Mao died more than 40 years ago and many people celebrating his birthday were not alive when he was born. They did not live through the “Great Leap Forward” and “Cultural Revolution” periods where, according to most estimates, between 18 million and 55 million people perished because of Mao’s policies. Their nostalgic reverence for the long-gone leader is not based on actual experiences but on some perception of what reality was back then – and a profound lack of historical knowledge.

Similarly, the Soviet Union’s longest ruling leader, Joseph Stalin, has been dead for almost 65 years and is generally blamed for at least 20 million to 25 million casualties because of his disastrous policies, including the famous “Great Purge” period. Again, a number of years ago, the population saw Stalin as an evil dictator but a sizeable number of Russians today long for “the good old days” of his reign. For people who lived through those tumultuous times, it is hard to fathom how anybody would want to return to such disastrous days.

Experience is one of the most underappreciated qualities. I remember a few decades ago lecturing in China on forecasting. The Chinese were just discovering the western business world and their analysts wanted to learn the secrets of accurate forecasting. That was how they phrased it: please give us your secret formulas for accurate forecasting. The obvious answer is that, in addition to the standard attributes (good data, quantitative skills, reasonable models, solid theoretical knowledge of how the world operates, and so on), a most important qualification is experience. Looking at developments, it is useful to learn from history and from one’s mistakes in trying to predict the future.

The unfortunate fact of life is that there are very few truly secret formulas. Experience can only come from years of doing something (read: from experience), and no shortcuts exist. Experience cannot be obtained by osmosis; it has to be learned by doing something for years and continuously improving.

The reality of life is that businesses in general do not value experience. Most big firms abolished in-house libraries and often do not collect historical data (“we are an engineering department, not a museum” is often heard). This goes along with an almost mythical belief that, with the vast proliferation of data sources and research methods on the internet, anybody can become an instant expert. Instead of utilising experience, a convenient approach is to rely on data available on the internet without realising all the pitfalls of such data.

How is this relevant to today’s world of aviation? The present situation is seen by most analysts and practitioners as very positive. The world economy is humming, the stock market is buzzing, airlines are enjoying record profits, backlogs of aircraft are at sky-high levels. What could possibly go wrong?
I have been quite outspoken for some time now about the possibility of us being in a bubble environment. I can even identify possible events that can cause the bubble to burst. What keeps me up at night, though, is the lack of experience of many of the important players in handling a possible downturn and avoiding the panic and costly mistakes that happened in the past. In the same way as the up cycle has its irrational elements, the down cycle will have potentially devastating consequences for the industry. Knowing how to handle the sudden plethora of returned aircraft contributing to an almost instantaneous drop in values is critical for survival.

There are two basic elements why this downturn may cause a lot of pain. One is the emergence of new players who have not had to face a downturn. The plethora of Chinese lessors is one example where their entire experience is only with the up cycle. The second is demographic: because we have not had a downturn for some time, the number of people still employed who are familiar with such a reality is getting smaller. Even more, there is a stubborn refusal by many players to learn from the past about what could go wrong. Not being prepared for events occurring during a downturn is a natural consequence of not accepting lessons that should have been gained from experience.

Hopefully, we will learn new lessons from the inevitable downturn which, eventually, we will be able to incorporate in the future to help the industry continue growing and prospering.

]]>https://www.avitas.com/tim-scott-will-be-attending-aero-engines-americas/feed/0Discover the AVITAS Online Value System and have a few laughs along the wayhttps://www.avitas.com/discover-avitas-online-value-system-laughs-along-way/
https://www.avitas.com/discover-avitas-online-value-system-laughs-along-way/#respondFri, 15 Dec 2017 17:01:08 +0000https://www.avitas.com/?p=4516A quick overview of the AVITAS Online Value System showing how easy, powerful and accessible the system is to obtain both aircraft and engine values (with a little humor thrown in!) ﻿﻿

]]>https://www.avitas.com/discover-avitas-online-value-system-laughs-along-way/feed/0A provocative view of globalisation futurehttps://www.avitas.com/provocative-view-globalisation-future/
https://www.avitas.com/provocative-view-globalisation-future/#respondWed, 25 Oct 2017 13:27:58 +0000https://www.avitas.com/?p=4387Airlines and original equipment manufacturers are showing signs of wanting to restrict competition, writes Adam Pilarski, Senior Vice-President at AVITAS Download the PDF Version – A Provocative View of Globalisation’s Future The past few decades are the age of globalisation. The world is getting smaller and much more interconnected. Trade has been growing in line […]

The past few decades are the age of globalisation. The world is getting smaller and much more interconnected. Trade has been growing in line with regional specialisation. These developments have been welcomed worldwide by economists, who always believe globalisation and the resulting trade will lead to a better allocation of scarce resources, the holy grail of our science. All those movements of people and goods have been a boon to aviation.

The fact that globalisation is not necessarily good for everybody has been also recognised for a long time. The Luddites were smashing machines two-and-a-half centuries ago protesting against progress, which they saw reducing their welfare. Recently, anti-globalisation movements have been gaining strength, asserting their influence via the political mechanism. Ironically, the two countries which introduced the free-trade ideology to the world and benefited for a long time from globalisation (the UK and US) have turned recently against these principles at the ballot boxes.

The negatives of worldwide globalisation have been widely discussed. While few people argue for downright isolationism, the trade-offs between the overall improved welfare of the world as a whole versus the local costs experienced in some places have been more in focus in the past few years.

These, though, are not the developments I want to discuss here. The lot of the horse and buggy driver who gets replaced by an automobile has been discussed enough. I want to focus on another aspect of the big globalisation issue: concentration of economic power.

Competition leads to higher efficiency, globalisation and specialisation. It also can lead to lower profit margins being competed away by others. The most efficient prevail and will want to keep this status quo forever. This can lead to an abandonment of free markets and a movement away from competition towards more monopolistic market structures. More market power is the goal of most firms competing in the market place but, paradoxically, the more successful they are exploiting free competition, the more
likely they may be moving into a dominant position and away from the concepts of competition. So, opposition to globalisation comes from two extremes: the poorest parts of the society losing their jobs and status, and the richest elements who, after gaining their position, want to maintain the status quo and forego competition.

The above-mentioned trends are quite prominent in aviation both among airlines and manufacturing. Starting with airlines. In the USA, we have very pronounced movements towards consolidation and concentration of economic power. Airlines claim they cannot make money with too much competition and managed to reduce options to the flying public. There have not been too many significant new entrants in the US domestic market for some time and all mergers have been approved by government bodies.

There have also been restrictions on foreign entities attempting to enter the US market. We have a lower legal maximum ownership by foreign capital in US airlines than many countries and when outsiders attempted to set up subsidiaries in the US they faced tremendous hurdles. The same for international flying where the attacks on the Gulf carriers and Norwegian cannot be seen as anything but a blatant attempt by those with market power to restrict competition.

Moving to the aircraft manufacturing side, we can also detect interesting developments away from globalisation and specialisation towards brute market power. Trying to reduce costs resulted in moving the production of parts of the final product around the world. That led to lower costs but also reduced the control the prime manufacturer had over the production process and greatly increased risks. The disaster of the 787 production, as one example, led to substantial delays and penalties, causing a rethink of this strategy.

And other original equipment manufacturers, both on the airframe and engine sides, faced similar environments across the world. Maybe outsourcing is not the way to go? Greater control may be better. However, moving that way will not help control costs as originally fantasised. The conflict between outsourcing based on the benefits of free competition for the sake of efficiency and insourcing in the interest of control in line with less competition and more monopoly power is now coming to the forefront of thinking by manufacturers.

The recent developments in manufacturing seem to be moving towards less outsourcing with its loss of control of one’s own destiny and toward attempting to reinforce a monopoly position. This is what Boeing is attempting to do by relying more on its unique position and hoping this will lead to greater profits by concentrating on all elements of manufacturing, not just on final assembly. The new goal of attempting to shift future profits from final assembly to the imprecisely defined “services” is an attempt to increase profits by utilising market power. The acquisition of B/E Aerospace by Rockwell Collins and, even more so, the potential merger of this entity with UTC follows the same plot line. All this will lead to interesting developments and potential conflicts between the ever more powerful manufacturers.

]]>https://www.avitas.com/provocative-view-globalisation-future/feed/0Percentage of World Widebody Aircraft Backlog for Middle Eastern Airlineshttps://www.avitas.com/widebody-aircraft-backlog-middle-eastern-airlines/
https://www.avitas.com/widebody-aircraft-backlog-middle-eastern-airlines/#respondWed, 04 Oct 2017 15:17:03 +0000https://www.avitas.com/?p=4335What Goes Up Must Come Down Middle East order backlog for widebody aircraft now totals about 700 aircraft. The order backlog in this region has risen rapidly from ten years ago and now represents about 30% of worldwide widebody aircraft orders. Of significance is the relationship between oil price and orders for widebody airplanes. As […]

Recent developments in the Middle East dampened the overall positive outlook for aviation experienced by the region, especially in the big three Gulf carriers (Emirates, Etihad and Qatar Airways), which had spectacular growth in the past few years.

These three airlines are located in a region with very difficult operating conditions and a forbidding climate, with a total citizen population that, when added together, would not make the list of the top 75 cities in China. Despite such an environment, the Gulf carriers grew at rates almost unheard of in the world. They also became a leading force in aviation, having a very active role in determining the shape of the industry.

The Airbus A380 would probably not exist without them, and the Boeing 777X might not have been launched. The region has been a crucial part of aircraft orders, especially in the widebody category.

Recent developments show lower traffic growth, lower productivity and aircraft order delays. Some see this as a result of the political conflict between Qatar and some of its regional adversaries. It is my contention that these unfortunate events are immaterial in the long run. What really matters are the oil prices. If they stay at similar levels as experienced now, as is my firm belief, future high rates of growth of Gulf carriers will not happen.

Unlike China or India which are blessed with huge populations, these carriers succeeded in exploiting peculiar circumstances and creating a wonderful product and highly successful airlines and airports. With miniscule home markets, they managed to secure a position where they have about 10% of the world’s in-service widebody fleet and more than 20% of widebody backlog. Interestingly, these shares were both about 1% 20 years ago, having shown a continuing upward trend almost every year. This trend stopped showing growth in 2014 when oil prices dropped.

To give the Gulf carriers appropriate credit, they transformed elements of airline traffic by introducing new ways of connecting passengers, not just via hubs but also by expanding traffic from secondary cities. Their service surpassed most competitors and introduced levels not achieved before. Their expat crews made flying fun again.

When I was asked years ago to assess these phenomenal developments my contention was that they were entirely because of the high price of oil. This does not detract from the fantastic job these airlines did but without high prices all this would not have happened. Let me start with dismissing the false reasons given for the growth of traffic in the region. It was not because of their central location. Yes, the Gulf is probably eight hours away from 80% of the world’s population (or whatever advocates claimed) but we can come up with virtually dozens of other cities with similar locations such as Kampala, Uganda.

Also, the argument pursued now that the success of Gulf carriers is entirely because of unlimited government subsidies does not make sense. How many decades was Alitalia subsidised? And how about Air India? Or the major Chinese carriers of today? Government subsidies did not make them power houses like the Gulf carriers are today.

Going back to my hypothesis, high oil prices represent three reasons for the Gulf carriers’ successes. One is simple economics. Even if Dubai does not have oil, many countries in the region have vast oil-induced wealth that attracts business people to visit, plus it generates incomes for locals who travel extensively.

Two, jet fuel is very heavy and when prices are high it is very uneconomical to carry it for long distances on board, hence hubs make good sense. Falling oil prices make this argument less pronounced, reducing the relative attractiveness of flying passengers via hubs.

Finally, the stiff opposition to the Gulf carriers’ expansion, especially in Europe and the US, reduces their market penetration. The US oligopolistic airlines did not suddenly raise concerns. Lufthansa in Europe was raising similar concerns pushing for de facto protectionism. The arguments were that Singapore, another very small country, managed to surprise the industry years ago and establish itself as a major force in aviation, and the Gulf carriers will establish a significant beachhead from which nobody will be able to displace them in the future.

While oil prices were high and expected to go even higher, many governments were reluctant to antagonise Middle East countries and allowed their expansion at the expense of local airlines supposedly in the interest of their economies. This rationale disappeared with lower oil prices, and the US and some European governments decided to take a much stronger protectionist stance.

So, if oil prices stay where they are, the Gulf carriers will have a greatly reduced impact on world aviation. The destiny of the A380 or the 777X may be seriously affected. One of the major sources of growth in the worldwide widebody market will pause, thus affecting the whole market tremendously.

]]>https://www.avitas.com/middle-east-slowdown-profound-implications-aviation/feed/0Who’s Exposed at Alitalia?https://www.avitas.com/whos-exposed-alitalia/
https://www.avitas.com/whos-exposed-alitalia/#respondThu, 11 May 2017 16:19:05 +0000https://www.avitas.com/?p=3383With Alitalia in bankruptcy (amministrazione straordinaria in Italian), which lessors have exposure? Alitalia has an aircraft fleet of just over 100 aircraft; the list above indicates some of the more prominent lessors who own aircraft deployed by Alitalia Their most popular aircraft with lessors is the A320-200 followed by A330-200s AerCap with seven aircraft, followed by […]

With Alitalia in bankruptcy (amministrazione straordinaria in Italian), which lessors have exposure?

Alitalia has an aircraft fleet of just over 100 aircraft; the list above indicates some of the more prominent lessors who own aircraft deployed by Alitalia

Their most popular aircraft with lessors is the A320-200 followed by A330-200s

AerCap with seven aircraft, followed by Avolon (6 aircraft), and AWAS (6) have the most aircraft exposure in terms of aircraft numbers; however Avolon, Air Lease Corp., and GECAS have the highest exposure in terms of aircraft value.

]]>https://www.avitas.com/whos-exposed-alitalia/feed/0Narrowbody Aircraft Rule the Roosthttps://www.avitas.com/narrowbody-aircraft-rule-roost/
https://www.avitas.com/narrowbody-aircraft-rule-roost/#respondThu, 04 May 2017 15:38:33 +0000https://www.avitas.com/?p=3289Narrowbody aircraft dominate the commercial aircraft landscape in absolute fleet terms As of April 2017, there are almost 16,000 NB aircraft in service worldwide with an order backlog of almost 11,000, a record number Widebody and regional jet aircraft are diminished in comparison And, the disparity is likely to get larger: the backlog of NBs […]